* Dovish Fed minutes underpin demand for U.S. bonds
* Benchmark yields set for biggest weekly drop since March
* Two-year yield retreats further from 10-month high
* Yellen's testimony before Congress next week seen key (Updates market action, adds quote)
By Richard Leong
NEW YORK, July 11 U.S. Treasuries prices rose on Friday, with benchmark yields nearing their lowest in five weeks, on safe-haven demand stemming from intensified fighting in the Middle East and worries about problems at Portugal's biggest listed bank.
Appetite for Treasuries has also been stoked by the minutes of the U.S. Federal Reserve's June policy meeting released on Wednesday, which hinted that the central bank is unlikely to raise interest rates until the second half of 2015.
Benchmark yields were on track to their biggest weekly decline in four months, as anxious investors scrambled for low-risk bonds and unloaded equities and other risky assets.
"People don't want to be short bonds going into the weekend with the situation in Portugal and the geopolitical concerns in the Middle East," said Larry Milstein, head of government and agency trading at R.W. Pressprich & Co in New York.
Worries that Banco Espirito Santo's problems may kindle another banking crisis in Europe abated after the Portuguese bank released a statement that said it had adequate capital to protect against any losses. The bank has been under scrutiny due to its link to a web of companies in the Espirito Santo business empire.
Meanwhile, Israeli air strikes continued for a fourth day on the Gaza Strip, stoking worries about tension spreading to the rest of the region.
These overseas developments have overshadowed upbeat news on the U.S. economy, analysts said.
Despite last week's strong June payrolls reading, the 10-year yield has fallen nearly 14 basis points this week, while two-yield has retreated from a 10-month high set on Tuesday.
While bidding on this week's $61 billion in fixed-rate government debt was relatively weak, analysts say appetite for Treasuries should remain solid as they are yielding more than their European and Japanese counterparts. U.S. yields, however, won't fall much further.
"We are rangebound here and this will continue in the foreseeable future," said Jim Kochan, chief fixed-income strategist with Wells Fargo Fund Management in Menomonee Falls, Wisconsin.
Looking ahead, traders await more clues on when the U.S. central bank will raise interest rates when Fed Chair Janet Yellen is scheduled to testify on the economy before Congress next Tuesday and Wednesday.
Top Fed officials on Friday showed no consensus on the timing of a rate hike. Chicago Fed chief Charles Evans told Bloomberg television it would not be a "catastrophe" if inflation were to rise above the Fed's 2-percent target, while Philadelphia Fed President Charles Plosser in a separate Bloomberg interview the central bank may be closer to hiking rates than most traders think.
On the open market, benchmark 10-year Treasuries were up 4/32 in price with a yield of 2.518 percent, down about 2 basis points from Thursday.
The two-year note was yielding 0.452 percent, down nearly 1 basis point on the day. (Reporting by Richard Leong; Editing by Peter Galloway and Diane Craft)